Roller-Coaster Ride

so we’ve got both of those worlds, both defensive interest and downright excellent return interest, for our group.

B.E.: Mr. Carter, what will be the performance of value stocks over the next few months?

NATHANIEL CARTER: There’s definitely a role for utilities and the traditional value names within our portfolio, although we try not to limit ourselves to what people would call traditional value sectors, such as capital goods and energies, utilities, and consumer cyclicals. We believe the value is where you find it, and you can’t really classify it by sectors. If you find an opportunity, tech stocks, for example, trading at a discount to [their] peer group, then that certainly would qualify, as well.

I believe there’s a secular shift going on in the way we value markets and stocks. We’ve had, what, six interest rate increases, and the cyclicals have done well. Every time [Federal Reserve Board Chairman Alan] Greenspan raises rates, the cyclicals get a bounce, rather than what it used to be where they would get hammered. And that’s largely a function of the fact that when you look at growth stocks that, conversely, were always deemed to be not very sensitive to the economy, when you see interest rates going up, now they get it, which didn’t used to be the case.

Having said that, we look at a broad range of companies. Utilities are certainly a part of that. But, at the same time, we own IBM (NYSE: IBM) and Intel (Nasdaq: INTC), two companies that are trading only at slight premiums to the market, that are obviously well-defined, well-established tech names, but we think there’s significant upside from here.

B.E.: Mr. Humphrey, what will be your approach to the market going forward?

STEPHEN HUMPHREY: Because the Fed has made a decision to slow down the growth of the economy, I think that most stocks will tend to react. The Fed has had a history of overshooting, and instead of creating a soft landing, which is the exception, not the rule, they tend to have a heavy foot or heavy hand. In this particular cycle, we think that the Fed is likely to hold [on rates]. The big key that I tend to watch in terms of trying to make a determination of how much tech to hold [is] productivity. And what’s been behind that has been the strong investment in technology. And if you look at the capital stock for technology, like computers, it’s growing [at a rate] greater than 40% and hasn’t slowed yet.

If you still have strong productivity, it means that the growth potential is still there. It also means inflation is kept in check, higher corporate earnings, and likely a higher stock market. Now last year, corporate earning went up about 17%. We [see earnings for] this year somewhere on the order of 16%.

B.E.: Mr. Coleman, you take a “focused equity” approach in terms of your portfolio. How do you go about sizing up the market and structuring your portfolio in reaction to current